Prevailing Cap Rates in Tacoma Washington

Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes

So I've got a Commercial Broker sending me leads from MFR in Washington, he's operating mostly in the Tacoma - Olympia area. But I'm blown away by the prevailing cap rates going on. Can anyone shed some light on the reason that cap rates are so low in the area?

Sold Comps

Year Built -- 1980, Cap Rate -- 5.53 Price - $899,000

Year Built -- 1978, Cap Rate -- 6.71 Price - $1,385,000

Year Built -- 1974, Cap Rate -- 6.81 Price - $1,900,000

A 40 year old building, in University Place with a less than 7% cap rate? The only conclusion I can draw is that it's Seattle Investors who want something they can drive who are paying all cash. What are your thoughts?

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Geordy Rostad

Real Estate Broker · Kirkland, WA · Member since 2018 · 549 posts · 411 votes

@Trevor Hatchard there are quite a few mobile home parks up here still. Several are listed right now but they are mostly smaller ones full of single wides. The nice big ones are being gobbled up by corporate buyers. I'd love to buy a mobile home park myself but personally I would only touch one that was on sewer and most of the ones I'm seeing are septic. DM me if you want and I'd be glad to email you a quick list of some parks I've seen here in Western Washington.

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Zach Schwarzmiller
Investor · Snohomish, WA · Member since 2013 · 629 posts · 84 votes
12y
Troy,

Core Seattle cap rates range between 4.0% - 5.0% typically depending on age, quality, and location. As you move away from the core market, the cap rates do increase. I don't necessarily see a correlation with age as you have indicated, but rather with location (most important) and quality of the asset. Core Tacoma & University Place both have colleges and larger employers driving demand, especially with the rising rents in Seattle forcing renters to move outside Downtown Core Seattle.

I don’t necessarily see the trends you’re referring to by your three sales comparisons. Tacoma to Olympia has a lot of multi-family between that would skew your comparisons; however, there are some transactions that fit within them as well.

A couple months ago I brokered a fractured 46 unit conversion at $35,000 a door in Lakewood, which frankly I hadn’t anticipated trading that high. Only 6 of the units were rentable, the rest ranged from needing light rehab to black mold and studs. This demand price was mainly drawn by the proximity to the JBLM base and the fact that the transaction was completely off-market.

Seattle is a competitive market – with companies like Starbucks, Boeing, Amazon, Microsoft, ect there is a large amount of local money in CRE. Most recently we've also seen a lot of outside investors move in because of how the market has been performing, especially on the multi-family side of things.
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Troy Fisher
OP
Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
12y
Zach,

In Specific the property sent to me is in Fircrest, and the comps came out of University Place. Having lived in Bellevue for many years, I always considered the majority of the Tacoma area to be a B to C asset class. And to find 5-6 caps in a 50 year old B or C asset class seems extremely low.

I appreciate your analysis of the market, it gives me more insight into what's going on up there. And let's me know that the broker isn't just trying to send me the bottom of the barrel properties.
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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
12y
Some markets are spec play driven.

Another key is not only the starting cap but what has the 5 to 10 year historical rent range been??

Some markets 3% annual increase might be typical but others might be higher or lower. Sometimes REIT's will buy low caps if the area has high demand and low product available. In this way they can increase the cap with annual gains over time to 7 or 8 etc. with a quality asset. Now their bet may or may not happen. Many spec markets are not yield driven.

My clients tend to prefer triple net once the yield gets so low on multifamily because you set it and forget it. So if we can't find a 8 to 9 cap with a seller held 10% second for example then the yield isn't there versus being hands off. Some will go for a 7 it just varies. My brother lives in Seattle but I have not been up there recently.
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Troy Fisher
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Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
12y
Thanks @Joel Owens interesting points to bring up. But my concern is that a 50 year old property in even University Place neighborhood of Tacoma could not be a quality asset. I know there has been some gentrification of Tacoma since sound transit has been built, but if this area has such low cap rates, what are the cap rates in Capitol Hill of Seattle? I guess I'm just trying to sniff out, why the prevailing Cap Rate is so low.

@Zach Schwarzmiller can you address the historical cap rates there in the University Place area of Tacoma?
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Zach Schwarzmiller
Investor · Snohomish, WA · Member since 2013 · 629 posts · 84 votes
12y
Cap rates typically range between 6-6.5%, or $70,000 - $90,000 per unit; however, as the other broker you've been speaking with indicated properties in better locations/conditions will go lower and properties in worse locations/conditions higher. I've got a off-market 31 unit that the seller would consider selling for $1,850,000. It's adjacent to the college with Whole Foods going in across the street. Interested?
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Troy Fisher
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Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
12y
Haha. Sorry Zach. I just can't get excited for something with such a small cap rate and ROI! I'm looking for more units so that it can be self-managed and return my equity contribution in 5-6 years. I know that with rising cap rates, I need to churn through some 50-100 units in the next couple years to get me into a nice big Triple-Net property that I can set and forget.
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Zach Schwarzmiller
Investor · Snohomish, WA · Member since 2013 · 629 posts · 84 votes
12y
:) understand. If you ever do need help in WA let me know!
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Eric M.
Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
12y
Just got my personal RE investor magazine yesterday which highlights Tacoma as a great REI city.
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Bryan R.
Tacoma, WA · Member since 2010 · 203 posts · 93 votes
12y
@Eric M.

Except if you're interested in SFR you have to battle Invitation Homes and the other funds for any deals.
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Troy Fisher
OP
Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
12y
Invitation Homes is in Tacoma now? That's a flag that it's time to sell SFH.
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Stephanie Dupuis
Residential Real Estate Broker · Bremerton, WA · Member since 2013 · 494 posts · 142 votes
12y
Tacoma had deals.
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Stephanie Dupuis
Residential Real Estate Broker · Bremerton, WA · Member since 2013 · 494 posts · 142 votes
12y
@Zach Schwarzmiller is providing excellent info about the area. We're experiencing 4-6.5% in Bremerton/Kitsap area, also.
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Troy Fisher
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Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
12y
I knew if I was going to invest back up there I'd have to start investing in Aberdeen and give @Brandon Turner a run for his money! Actually I'm looking at the Tri-Cities also, any thoughts about the prevailing cap rates there?

Also @Zach Schwarzmiller any chance the Whole Foods is a free-standing pad site that they are doing a lease-back offer on?
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Troy Fisher
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Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
12y
@Eric M. I'd say if you are reading about it in a magazine, it's probably already too late for the market.
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Zach Schwarzmiller
Investor · Snohomish, WA · Member since 2013 · 629 posts · 84 votes
12y
Were selling a building in Aberdeen, 26 units for $250,000 - $/Unit is awesome. The upside on a conservative cap rate once stabilized is about 22% - that's petty awesome.

Also helping a client purchase a building in Tri-Cities. Cap rates tend to be lower over there as well but it's a rapidly growing city. I've sold a few buildings in Spokane they are a bit further behind, but on the REO's we get offers like crazy - generally speaking they are fractured projects.

Whole Foods is not yet developed, it will be freestanding and there will be pad sites associated with the development, I would assume.
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Jason Munck
Spokane, WA · Member since 2013 · 57 posts · 7 votes
12y
@Zach Schwarzmiller

Forgive my remedial question; can you explain what you mean by "fractured projects".
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Zach Schwarzmiller
Investor · Snohomish, WA · Member since 2013 · 629 posts · 84 votes
12y
@Jason Munck

@Jason Munck undefined

Fractured meaning there some was element of new or redevelopment which was taking place and uncompleted for some reason. Say you have a 20 unit multi-family to condo conversion than ran out of money leaving 5 units fully converted, 5 units 3/4 of the way done and the remaining 10 units completely gutted. I would consider/call this a fractured condo conversion project. Hope that helps - others may call it different things.
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Brandon TurnerPro Member
Investor · Maui, HI · Member since 2009 · 13k+ posts · 3k+ votes
12y
Stay away Troy Fisher ! Aberdeen is mine! ;)
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Marc RamsayPro Member
Investor · Ojochal, Costa Rica · Member since 2013 · 287 posts · 164 votes
12y
Hey! Come on up to Vancouver where you can get a solid 2 to 4% cap rate. :)

Still trying to figure out why people invest up here. Then again, I've run into a lot of people trying to sell at an 8 cap in Cleveland, OH, lately. Do they think they're in Houston or something?

Sorry, I digress....
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Zach Schwarzmiller
Investor · Snohomish, WA · Member since 2013 · 629 posts · 84 votes
12y
@Marc Ramsay

Your low cap rates have been awesome for us. We've had a couple Canadian buyers come down and be happy with 5-5.5% cap rates in North Snohomish County which is fantastic! Sold a 20 unit in Arlington at 5% cap rate (higher end, but still great cap rate) a couple months ago.
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Troy Fisher
OP
Specialist · Kirkland, WA · Member since 2013 · 1k+ posts · 817 votes
12y
Originally posted by Zach Schwarzmiller:
Were selling a building in Aberdeen, 26 units for $250,000 - $/Unit is awesome. The upside on a conservative cap rate once stabilized is about 22% - that's petty awesome.

Yah, that's fantastic! 22% Cap rate is the range of the world falling down around my head though. Where's my sweet spot?
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Zach Schwarzmiller
Investor · Snohomish, WA · Member since 2013 · 629 posts · 84 votes
12y
Well, this particular property was taken back through foreclosure (owners note) Feb 2013, and there was a ton of deferred maintenance. There are no historical operating figures, and were having to get rooms rent ready. To buy this you have to be confident in your pro-forma numbers or else your not really buying it on that high of a cap rate.
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Giovanni Isaksen
Investor · Bellingham, WA · Member since 2010 · 308 posts · 230 votes
12y
@Marc my guy in Vancouver keeps sending me 3 and 4 cap deals. My question is always if you're buying at a three and change, what exit cap rate are you targeting? Although I think the low was early last summer when he sent a 2.7 deal... on proforma numbers.
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Marc RamsayPro Member
Investor · Ojochal, Costa Rica · Member since 2013 · 287 posts · 164 votes
12y
@Giovanni Isaksen I don't know as I don't invest here because of the outrageous prices and the low cap rates. All my investemnts are currentlyl in Cleveland and Akron, Ohio.
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Duncan Taylor
Real Estate Investor · Member since 2013 · 866 posts · 487 votes
12y
Originally posted by Troy Fisher:
So I've got a Commercial Broker sending me leads from MFR in Washington, he's operating mostly in the Tacoma - Olympia area. But I'm blown away by the prevailing cap rates going on. Can anyone shed some light on the reason that cap rates are so low in the area?

Sold Comps

Year Built -- 1980, Cap Rate -- 5.53 Price - $899,000

Year Built -- 1978, Cap Rate -- 6.71 Price - $1,385,000

Year Built -- 1974, Cap Rate -- 6.81 Price - $1,900,000

A 40 year old building, in University Place with a less than 7% cap rate? The only conclusion I can draw is that it's Seattle Investors who want something they can drive who are paying all cash. What are your thoughts?

Unless those comps came from your own due diligence you can't trust them.

The games played with 'published' comps in commercial and multi-family properties are legend.
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